FCA chief: Savers can use homes to fund their pension

FCA chief executive Andrew Bailey says consumers can use their homes flexibly to fund retirement income, rather than saving for both property and a pension at the same time.

Speaking today at the Pensions and Savings Symposium in Gleneagles, Bailey warned of the challenges facing retirement savers in the current low-interest rate, low growth environment.

Bailey’s theory-heavy speech touches on behavioural economics and the lifetime savings model – which is based on the assumption that consumers make decisions about spending based on the resources they have access to at the time and irrespective of income at each point in their lives.

He told delegates the two big investments in the lifetime model – a home and a pension – have both risen in cost which is changing consumer behaviour.

Bailey was wary on holding housing as part of a pension because of uncertainty of returns.

He said: “An alternative approach, again best viewed within the lifetime model, is that rather than save for housing and retirement income at the same time, people would use the former to fund the latter…Here the focus is on how much they invest in their own dwelling over their lifetime.”

Bailey says, depending on how much people invest in their property over their lifetime, they could choose to downsize their home at retirement or buy an equity release mortgage to access funds without moving.

However, he issues the following caution about equity release products: “While the approach has an appeal in terms of the lifetime investment pattern, the accompanying financial instrument is made much more complicated by the need to embed in it a no-negative equity guarantee. This can have both prudential and conduct consequences.”

He said he did not believe in the idea of using housing as part of a pension portfolio.

He said: “There is an argument that pension saving would be assisted by people holding more housing in their stock of pension assets, based on the real appreciation in the value of housing. I don’t subscribe to this argument.

“Why? First, because given the scale of uncertainty over long-run real returns on assets, I would not favour overweighing to any one asset class, while recognising that a balanced portfolio can be exposed to property. But, increasing the weight on housing investments could be self-defeating.

“If the effect of increasing the demand for housing as an asset to own is to push up the cost of ownership, an increase in holdings of housing as pension assets will tend to increase the real cost, and thus household indebtedness.”

Am I reading this correctly, is the head of the FCA giving out advice (albeit in the form of a blanket statement)… in his opinion he is saying go a buy a house (probably get in debt at the same time) and then in the future hope to extract some profit (assuming there is any of course there can’t possibly be any risk in this can there ?), rather than buy a pension (from the guys and girls I regulate). Thanks for the vote of confidence in the industry. No doubt next week we will have a senior estate agent telling punters don’t buy property, get a pension ! I feel much better about paying my FCA fees next week now.

Confusing messages…. not least as the implication is you can hold housing in a pension (when you can’t). I suspect that’s been ‘lost in translation’

Secondly, investing your retirement in a single asset class which also turns out to be your home (and using gearing too) as outlined above flies in the fact of diversification (on so many levels) and yet it worries me property is seen as an investment pancea.

I’ve met a handful of people who had planned to downsize to fund for retirement but when faced with leaving the family home they could bring themselves to do it – leaving them with the contentious option of using equity release and the costs / dilemmas which that brings….. and that’s on the back of a 20 year boom in house prices!

Perhaps another solution is to borrow £100k, invest it in shares, service the debt and in 20 years hope the capital has grown. I can’t imagine the FCA would be cool with us recommending that as a retirement strategy but that’s what is being done all over the country – albeit holding a different asset class.

If he was a financial adviser, he would die on his feet with his convoluted way of expressing himself. What is all this?…..“While the approach has an appeal in terms of the lifetime investment pattern, the accompanying financial instrument is made much more complicated by the need to embed in it a no-negative equity guarantee. This can have both prudential and conduct consequences.”

Whilst he may regulate mortgages (which of course lead to house ownership) and the majority of the UK pensions/investments market, he instead feels it is better to say that in order to properly plan for retirement you buy into an asset class that the FCA doesn’t regulate (yet). What does that tell you about his own confidence in the industry that he overseas. Was it to much to hope that he could just say, yes in order to plan to retire you can have confidence that (by and large) seeking advice from an FCA regulated adviser and saving into an FCA authorised scheme is the only thing we can / should recommend.

Here we read in written evidence that, indeed, the regulator poses more market risk than the regulated !

With regards to Mr Bailey, I have to admit I was in agreement with his opening statement in the regulation round up e-mailed last week…..but here we are offering blanket solutions just like his former CEO M Wheatley

Given that an essential part of the role for the FCA is clarity for the consumer, I’m not sure what I would do if I was attempting to follow this “advice.” I understand that he was addressing a professional group but even so he is now leading our key regulator from, it would appear, a purely theoretical standpoint. And we all know that consumers always act in the way that these models suggest, so that should be OK then.